Minnesota Department of Human Services, DAB No. 653 (1985)

GAB Decision 653

June 7, 1985

Minnesota Department of Human Services;
Ballard, Judith A.; Settle, Norval D. (John) Ford, Cecilia Sparks
Docket No. 84-103

The Minnesota Department of Human Services (MDHS, State) appealed the
disallowance by the Health Care Financing Administration (HCFA, Agency)
of $1,217,905 in federal financial participation (FFP) claimed under
Title XIX (Medicaid) of the Social Security Act (Act). The disallowance
was base on a HCFA review of MDHS's cash management practices. HCFA
determined that as of March 31, 1983 there were firmly established
overpayments to Medicaid providers for which the federal share had not
been credited to HCFA. The major issues presented are whether section
1903(d)(2) of the Act authorizes HCFA to demand that the State repay to
HCFA the FFP share of identified overpayments to Medicaid providers,
even though the State may not have collected the overpayments from the
providers, and whether the difference between interim and (lower) final
rates for nursing home providers are overpayments or costs of medical
assistance. Other issues presented are whether, in requiring credit for
firmly established overpayments when identified, HCFA is revoking its
prior approval of the MDHS's overpayment policies or following otherwise
inconsistent policies. We regard as well settled our conclusion that,
under section 1903 (d) (2) of the Act, HCFA may require states to return
the federal share of firmly established overpayments to Medicaid
providers regardless of whether the state has or ever will collect these
amounts from the providers. Also, the difference between interim and
(lower) final nursing home rates are overpayments subject to adjustment
by HCFA, not medical assistance payments to be adjusted under section
1903(d)(3) only when recovered by the State from the provider. We also
conclude that HCFA is not precluded from requiring MDHS to credit HCFA
with the federal share of firmly established overpayment amounts by
virtue of any MDHS policies or inconsistency in HCFA's own overpayments
policy. Accordingly, we uphold the disallowance, except for one
provider ($13,698.24). We reverse the disallowance for the one (2)
provider where the finality of the amount due to MDHS is in question,
since the record does not independently establish the alleged
overpayment as an unallowable cost. The Minnesota Court of Appeals had
reversed the MDHS overpayment determination and the case is now pending
before the Minnesota Supreme Court. The parties recognized throughtout
that the amount of the disallowance would be adjusted to reflect only
amounts outstanding and not yet repaid to HCFA. With the exception of
the one provider where the overpayment is not final, the parites should
now proceed to determine how much of the amount initially disallowed
remains unpaid.

General Background

Title XIX of the Act provides for the payment of federal monies to
states to aid in financing state medical assistance programs. Any state
that wishes to participate in the Medicaid program must develop and
submit a plan that meets certain requirements set forth by the Secretary
of the Department of Health and Human Services (HHS). Realizing that
many states might have difficulty financing a Medicaid program even if
subsequently reimbursed by the federal government, Congress also
established a funding mechanism by which HHS advances funds to a state,
on a quarterly basis, equal to the federal share of the estimated cost
of the program. After review of the state's quarterly statement of
expenditures, the Secretary may adjust future payments to reflect any
overpayment or underpayment which was made to the state for any prior
quarter. Section 1903(d) of the Act. Section 1903(d)(2) of the Act
states: The Secretary shall then pay to the State . . . the amounts so
estimated, reduced or increased to the extent of any overpayment or
underpayment which the Secretary determines was made under this section
to such state for any prior quarter and with respect to which adjustment
has not already been made under this subsection. . . . Section
1903(d)(3) of the Act states: The pro rata share to which the United
States is equitably entitled . . . of the net amount recovered during
any quarter by the State . . . with respect to medical assistance
furnished under the State plan shall be considered an overpayment to be
adjusted under this subsection. (3) Case Background Based on a review of
the MDHS cash management procedures, HCFA determined that as of March
31, 1983, there were firmly established overpayments to Medicaid
providers of $1,217,905 that had not been credited to HCFA. HCFA
Response, Ex. 1, "Report on Review of Cash Management Procedures Under
Title XIX . . .," dated November 3, 1983 (Report). The Agency
accordingly disallowed FFP in that amount. HCFA noted in its
disallowance letter that the overpayments not yet credited to HCFA were
due "from providers who either waived their right to appeal, who had
exhausted all of their appeals, or who had appeals in process already
exceeding 12 months." Citing section 1903(d)(2) of the Act, HCFA
concluded that "the Secretary . . . is obligated to recover the federal
share of any Title XIX overpayment determined to have been made and not
previously adjusted. This adjustment must be made whether or not the
State has yet recovered, or ever will recover, the amount of the
overpayments from the providers." Disallowance letter, p. 1, State
Appeal File, Ex. C. Exhibits A-H to the disallowance letter identified,
for each type of overpayment, the providers and amounts disallowed.
HCFA's Review Findings One objective of HCFA's cash management review
was to determine whether the State properly recorded identified
overpayments and promptly returned the federal share. Report, p. 1. The
reviewers concluded that the State maintained adequate records of
accounts receivable and collections but expressed concern about the
amount of time between identification and collection. Report, p. 2. The
reviewers cited the requirement in 45 CFR 201.5 that MDHS's quarterly
statement of expenditures show "the share of the Federal Government in .
. . expenditures not properly subject to (FFP)," concluded that the
amount of time between identification and collection was primarily due
to "the State's policy of making many collections on an installment
basis," and found that the State's practice of returning the federal
share of overpayments only after the State had collected from the
provider was costing the federal government substantial amounts in lost
interest. Report, p. 3. The Report recommended that the State credit
outstanding overpayment amounts to HCFA. The Report also contained
HCFA's response to the State's comments on a draft of the Report. The
State's comments raised some of the same points addressed in the
Analysis below; HCFA's response to the State's comments reiterated its
determination that overpayments must be adjusted prior to collection.(
4) The Overpayments The disallowed amount includes the following:

* The difference between interim and (lower) final rates set for
reimbursement of nursing home services.

* The difference between interim and (lower) final rates set for
reimbursement of hospital services. All identified overpayments of this
type have been repaid; the parties regard this aspect of the dispute to
be moot. State Appeal Brief, p. 8.

* Overpayments to non-institutional providers uncovered by
investigations of fraudulent or abusive billings by the MDHS
Surveillance and Utilization Review Section (SURS).

* Overpayments resulting from errors committed by the provider or
MDHS in processing claims ("Invoice Processing Debit Adjustments").
These overpayments apparently include institutional as well as
noninstitutional providers. State's May 8, 1985 letter. The State
agreed that the SURS and invoice processing amounts are section 1903(
d)(2) overpayments. The dispute here concerns when repayment of the
federal share is required. The State does not agree, however, that the
amounts identified as a nursing home rate adjustments are section 1903(
d)(2) overpayments. Rather, the State argues that interim rate payments
to nursing home providers are medical assistance payments pursuant to
MDHS's approved state plan, so that, under section 1903(d)( 3), HCFA is
entitled to the federal share of MDHS's actual recoveries. /1/

(5) Analysis I. Previous Board decisions on whether HCFA can adjust for
overpayments prior to recovery. The general question of whether HCFA has
the authority to demand from states the federal share of identified
Medicaid provider overpayments prior to the actual recovery of the
overpayments by the states has been examined by the Board in a series of
decisions. Many of the arguments made in this appeal have been raised
and considered previously by the Board. In its decisions the Board has
held that improper or excess payments to providers do not constitute
"medical assistance" within the meaning of the Act, and that, therefore,
HCFA is empowered by section 1903(d)(2) of the Act to collect the
federal share of these payments, even if a state has not yet recovered
them from the providers. Massachusetts Department of Public Welfare,
Decision No. 262, February 26, 1982; Florida Department of Health and
Rehabilitative Services, Decision No. 296, May 15, 1982; New York State
Department of Social Services, Decision No. 311, June 16, 1982;
Illinois Department of Public Aid, Decision No. 404, March 31, 1983;
(6) Pennsylvania Department of Public Welfare, Decision No. 426, May 24,
1983; Missouri Department of Social Services, Decision No. 448, June
30, 1983; New Jersey Department of Human Services, Decision No. 480,
November 30, 1983; New York Department of Social Services, Decision No.
526, March 30, 1984; California Department of Health Services, Decision
No. 619, January 28, 1985, Iowa Department of Human Services, Decision
No. 629, March 18, 1985, Ohio Department of Public Welfare, Decision No.
637, April 2, 1985; and Washington Department of Social and Health
Services, Decision No. 645, April 30, 1985. Several of these decisions
have been appealed to federal courts. In Massachusetts v. Heckler, 576
F. Supp. 1565 (D. Mass. 1984), Board Decision No. 262 was reversed on
the grounds that HHS had not established that payments to a provider at
an interim rate higher than a final rate constituted an overpayment for
purposes of section 1903(d)(2). However, the United States Court of
Appeals for the First Circuit, on November 28, 1984, reversed the
judgment of the District Court and upheld Board Decision No. 262.
Massachusetts v. Secretary, 749 F.2d 89 (1984), petition for cert.
filed, 53 U.S.L.W. 3652 (Feb. 25, 1985) (No. 84-1363). On October 1,
1984, the United States District Court for the Northern District of New
York, in Perales v. Secretary, Case No. 83-CV-900, affirmed Board
Decision No. 311. /2/

(7) In the above appeals, states argued generally that HCFA was not
entitled to recoup the federal share of overpayments to providers until
the payments were recovered, and that section 1903(d)(3) limited any
federal interest to a pro rata share of the amount actually recovered.
The Board's reasoning in rejecting these arguments can be summarized as
follows: * Section 1903(d)(3) does not by its terms relate back to all
overpayments contemplated by section 1903(d)(2). * Since section 1903(
d)(3) refers to amounts recovered with respect to "medical assistance
furnished under the State plan," it reasonably may be viewed as
referring only to state payments which are allowable "medical
assistance" costs, under section 1903(a) of the Act. * The legislative
history supports the Agency's position that section 1903(d)(3) was
designed to authorize the Secretary to adjust in situations where a
question might have existed as to a state's liability to repay the
federal share or the Agency's ability to recoup the share by an offset
to future claims. * The more general language of section 1903(d)(2) has
been consistently read together with section 1116(d) of the Act, so that
a determination that a state had claimed and received FFP in unallowable
costs is tantamount to a determination that the disallowed amount is an
overpayment to be adjusted under subsection 1903(d)(2). See, e.g., 45
CFR 201.10 et seq.; Solomon v. Califano, 464 F. Supp. 1203, 1204 (D.
Md. 1979). * Neither the Agency nor the courts have ever interpreted
section 1903(d)(3) to prevent adjustment under section 1903(d)(2) of an
amount determined by the Secretary to be unallowable, merely because the
state has not recovered the amount from a provider. /3/

(8) * Even if rates initially paid to nursing home providers were set
consistent with approved state plan provisions, once there is a final
determination by a state that the initial rates were too high, there is
an overpayment to the provider subject to adjustment under 1903(d)(2)
because the difference is in excess of what the provider is entitled to
under the state plan. II. The State's arguments here. Notwithstanding
the above cases, the State argued in this appeal that the disputed
nursing home overpayment amounts were costs incurred for medical
services under the State plan and thus were payments for "medical
assistance" which, under section 1903(d)(3), cannot be considered
"overpayments" until the State actually recovers them, at which time
HCFA would be entitled to the federal share of the amount actually
recovered. The State relied on both Pennhurst State School v.
Halderman, 451 U.S. 1 (1978), and Harris v. McRae, 448 U.S. 297 (1981).
The State argued that

the result of HCFA's position is a system which requires MDHS to bear
alone medical assistance expenditures, even through those expenditures
were made pursuant to an approved state plan. That result squarely
contravenes the purpose of Title XIX. (citation omitted) Moreover, to
require MDHS to bear the full cost of the difference between a
provider's interim and final rate either temporarily or permanently,
could seriously cripple (the) State's attempts to provide other
necessary medical services embraced by its plan. (citation omitted)$%
State Appeal Brief, p. 23. The State further argued that Title XIX
precluded HCFA from imposing on the State the full burden of unrecovered
or unrecoverable nursing home final rate adjustments. Also for the
nursing home final rate adjustment overpayments, but, in particular, for
the SURS and invoice processing overpayments, the State argued that HCFA
is not entitled to recover the federal percentage of such overpayments
until MDHS recovers such payments because HCFA has condoned such a
policy for many years, and did not properly revoke its prior approval.
In addition, MDHS's policy is consistent with the position of the HHS
Office of Inspector General. State Appeal Brief, p. 12. (9) III.
Agency's interpretation of 1903(d)(2). Our past decisions recognized,
and the reviewing courts have concurred, that the difficulty in
interpreting section 1903(d) stems from the lack of a definition of
"overpayment." The State argued that use of the term overpayment twice
in section 1903(d)(2) makes the meaning of overpayment ambiguous because
HCFA ascribes a "different meaning to the term each time it appears in
(section 1903(d)(2))." State Reply Brief, p. 11. The second sentence of
section 1903(d)(2) reads: Expenditures for which payments were made to
the State under subsection (a) shall be treated as an overpayment to the
extent that the State or local agency administering such plan has been
reimbursed for such expenditures by a third party pursuant to the
provisions of its plan in compliance with section 1902(a)(25). Section
1902(a)(25) requires the State, where possible, to recover the costs of
medical assistance from legally liable third parties. By providing that
"to the extent" the State receives reimbursement from a third party the
amount "shall be treated as an overpayment," the statute does not, we
believe, give rise to any ambiguity. Moreover, considering section
1903(d) as a whole, HCFA's reading makes more sense. The language of
the second sentence of section 1903(d)(2) is similar to section
1903(d)(3). In analyzing an argument similar to the State's position
above, the Board noted that -- the specific subject of (d)(3) is not
"recovery of overpayments" as the State alleged, but treatment of
certain recoveries as overpayments. The plain language of (d)(3)
concerns amounts which would ordinarily not be considered "overpayments"
because they were "medical assistance furnished under the State plan"
and therefore, were allowable when made. When such amounts are
recovered, (d)(3) described the extent to which the federal share is to
"be considered an overpayment" for purposes of adjustment under (d)(2).
Thus, (d)(3) does not constitute a limiting definition of the term
"overpayment" in (d)(2). Contrary to the State's assertion, the Agency
interpretation does not render (d)(3) superfluous, ineffective, or
insignificant, but, rather, gives effect to both provisions and is
supported by the statutory scheme as a whole. Decision No. 311, pp.
5-6. (10) The Court in Perales, supra, called this statement a "sound
conclusion . . . amply supported by the statutory language." Slip op.,
p. 14. The Board's conclusions for section 1903(d)(3) are equally well
taken here. After the parties had submitted their briefs in this appeal,
the Court of Appeals for the First Circuit issued its decision in
Massachusetts reversing the district court. While declaring 1903(d)
"less than crystal clear" and calling the question "close," the court
adopted the Secretary's interpretation of 1903(d). Massachusetts, p.
94. Essentially, the court of appeals found the Secretary's
interpretation of the statute as reasonable as that of Massachusetts,
holding that "Congress could scarcely have meant to reimburse a state
for excessive cost of services." Id. In upholding the Secretary's
position, the court declared that it was appropriate to give deference
to the reasonable and statutorily permissible interpretation of the
agency responsible for the administration of the program. Id., pp.
95-96. The State argued that the court of appeals' decision is
erroneous, and should not control Minnesota's appeal. In particular,
the State contended that the court of appeals in Massachusetts
improperly distinguished Pennhurst and Harris. The State's general line
of reasoning, in essence, ignores the focal point of the Board's
analysis which was upheld by the court of appeals in Massachusetts, and
which we affirm here. By reimbursing Medicaid providers amounts in
excess of what the providers were entitled to be paid under the State
plan, the State claimed FFP in an amount greater than it was entitled to
claim, i.e., FFP in the rate ultimately determined to be the correct
one. The court confirmed that such excess amounts are not "medical
assistance furnished under the State plan," but rather are overpayments
subject to the provisions of section 1903(d)(2). Section 1905(a) of the
Act defines "medical assistance" generally as "payment of part or all of
the cost" of covered services provided to eligible individuals. We do
not believe that the term "cost" here should be read as meaning the
"'cost' to MDHS," so that any amount paid by the state to a provider
should be considered "medical assistance." We do not agree with the
State that the term "cost" should be accorded its "ordinary meaning" so
that the State is entitled to FFP in its "actual cost." State Reply
Brief, pp. 12-14. This is simply too broad and would, in essence,
oblige HCFA to pay FFP in clearly unallowable costs so long as they were
actual costs. To adopt this reading would (11) totally ignore other
statutory and regulatory provisions setting limits on allowable provider
reimbursement amounts and, indeed, ignores the rest of section 1905(a)
which limits "medical assistance" to covered services provided to
eligible individuals. See, e.g., section 1902(a) (13). As to the issue
of the compatibility of HCFA's position on recovery of overpayments with
the cooperative federalism foundation of the Medicaid program, the Board
has previously concluded: (W)hile it is true that Congress devised the
Medicaid program as a joint federal-state endeavor, the states have the
primary responsibility for administering the program, including the duty
to take steps to prevent improper payments in the first instance and to
identify and recover overpayments in a timely manner when they do occur.
However, to sort out these cases would be difficult, requiring a highly
judgmental case-by-case analysis. Viewing the program as a whole,
therefore, we think that the Agency is not unreasonable in requiring the
states to bear the burden of unrecovered overpayments. Decision No. 311,
p. 7 The district court in Perales supported this view for similar
reasons, and concluded that: The partnership upon which plaintiff relies
does not in and of itself entitle the State to disclaim or abdicate its
own obligations in order to make its own responsibilities easier to
bear. Slip op., p. 21. The Court of Appeals for the First Circuit said:
Since Medicaid is a joint program of the state and federal governments
for providing health care, it is appropriate to inquire whether imposing
that portion of the rate differential at issue on Massachusetts or the
Secretary will better conserve the limited pool of resources available
for that purpose. Since only Massachusetts deals directly with the
providers, and since the state is empowered to perform on-site audits of
these institutions, it is clearly the party best able to minimize the
risks resulting from dealing with insolvent providers. The fact that
Massachusetts will in any event bear a share of the loss, and so already
has some incentive to minimize these risks, diminishes but does not
destroy the force of this observation. Placing an additional burden on
the state will increase its incentive (12) to take care, whereas the
Secretary remains powerless to reduce the risks no matter what the costs
imposed on her. Massachusetts, p. 96. Accordingly, we conclude that
HCFA's actions and policies are not contrary to the cooperative nature
of the Medicaid program recognized in Harris. The court of appeals'
decision also answers another argument advanced by the State. The State
contended that the Secretary was imposing a post-acceptance retroactive
condition which was contrary to Pennhurst. However, the court of appeals
declared: We do not believe that Pennhurst requires that every arguably
ambiguous provision conditioning the receipt of federal funds by a state
be construed in the state's favor . . . . Pennhurst found the imposition
of new conditions on the receipt of federal funds repugnant to the
notion that by accepting the funds the state had thereby entered into a
contract with the federal government and was entitled to have its
bargain enforced as written. Pennhurst, 451 U.S. at 17. The present
case involves not the imposition of a new condition on the state but the
interpretation of the provisions governing the remedies available to the
federal government. No principle of contract law requires us to
construe such a provision consistently against a federal government
obligee. Massachusetts, p. 95; see also Bennett v. Kentucky, 53
U.S.L.W. 4336 (March 19, 1985). In light of the Board's past decisions
and the court of appeals' opinion in Massachusetts, we are not persuaded
that HCFA's interpretation of section 1903(d) is incorrect, that this
interpretation violates the partnership concept of the Medicaid program,
or that it involves the improper imposition of conditions on the receipt
of grant funds. IV. Whether the $13,698.24 overpayment amount now
before the Minnesota Supreme Court is a firmly established overpayment
amount subject to immediate adjustment. The record shows an overpayment
balance of $13,698.24 for a physician provider, No. 2005313. /4/ The
HCFA review report makes no independent finding concerning why this
overpayment amount is unallowable; the basis for the disallowance is
the State's recorded debit balance. State's Appeal File, Ex. C,
Disallowance letter, Ex. G, p. 1. The State indicated that MDHS is
precluded by law from collecting these funds. The Minnesota Court of
Appeals overturned an administrative law judge's decision ordering the
physician to reimburse MDHS. The State has petitioned the Minnesota
Supreme Court, where this matter is still pending. State Reply Brief,
p. 2, and State's May 8, 1985 letter.

As we explained in Ohio Department of Public Welfare, Decision No. 637,
April 2, 1985, where HCFA relies on a state determination that an
overpayment has occurred, the state must have an opportunity to show why
its initial determination is not reliable. The Board must then judge
whether the record before us provides a sufficient factual and legal
basis to support a disallowance determination. Here the fact that the
Minnesota Court of Appeals overturned the State's initial overpayment
determination calls that determination into question. Absent an
independent determination by HCFA that the payment was unallowable, we
do not have a sufficient basis to uphold the disallowance. Moreover, the
State's appeal is still pending and the record does not show that the
State regarded the status of its overpayment determination as immaterial
to its collection of the overpayment amount. Accordingly, we overturn
the disallowance on the basis that the record is insufficient to show a
firmly established overpayment amount properly subject to immediate
adjustment. V. Whether HCFA's policy was inconsistent. In support of its
position that HCFA has been inconsistent in its policy on recovery of
overpayments, the State submitted a 1984 memorandum relating to Medicaid
fraud from an official in the HHS, Office of Inspector General (OIG)
(Chief of the State Fraud Branch, OIG). State Appeal File, Ex. I. The
memorandum stated that "existing HCFA policy is that state payments will
not be reduced due to the identification of an overpayment" by the
Medicaid Fraud Control Unit. The memorandum also stated, "Payments
should not be reduced based upon overpayments identified but not as yet
recovered." (emphasis in original) The State also submitted an affidavit
from the State counsel for this appeal stating what was said during a
telephone conversation on June 11, 1984 between the State counsel and
the HHS, OIG official who issued this memorandum. The affidavit states:
(The official) informed me that he believes that the position HCFA has
taken in the disallowance is (14) incorrect. He further informed me
that the Office of Inspector General did not intend to alter its
position as set forth in the memorandum that "HCFA will account for
overpayments and recover the pertinent FFP when such monies (the full
overpayment or some part thereof) are actually recovered by the State."
In response, HCFA submitted an affidavit dated October 15, 1984 from the
same official stating that the memorandum did not "accurately enunciate"
HCFA's policy on the collection of overpayments. HCFA Response, Ex. 2.
HCFA argued that its position here is consistent with numerous other
disallowances, which were sustained by this Board. HCFA also argued
that the OIG official -- had no authority to make binding statements
regarding HCFA's policy in this area. At most he was giving his
personal understanding of HCFA policy which, regrettably, was in error.
HCFA Response, p. 24. The memorandum does not appear to have been
intended as a HCFA policy statement, as it was directed only to the
State Medicaid Fraud Control Units, and was not issued as part of HCFA's
formal system of guidance to the states. Furthermore, we note that it
directly contradicts section 2555.2 B of the State Medicaid Manual.
Section 2555.2 B states: Overpayments are not considered payments made
in accordance with a State plan, and therefore, no FFP is available for
such payments. The Federal share of any overpayment must be returned to
HCFA in the same quarter in which the overpayment is identified, and is
neither contingent upon, nor subsequent to, the State's recovery of any
portion of the overpayment. Section 2555.2B was added to the State
Medicaid Manual in December 1981. The HCFA review upon which this
disallowance was based covered the period October 1, 1981 through
September 30, 1982, with the amount of outstanding overpayments adjusted
to reflect overpayments outstanding as of March 31, 1983. The OIG
information memorandum was issued on March 6, 1984. Since the amount in
dispute here is continually reduced as the State recovers the
overpayment amounts and in turn credits the federal share to HCFA, it is
certainly possible that there are no amounts at issue which pre-date the
State Medicaid Manual. (15) The State also relied on Pennhurst as
support for its argument that the disallowance is improper given the
alleged inconsistency in HCFA's policy statements. We discussed above
the application of Pennhurst to the questions presented by this appeal.
We will simply note here that we agree with the Agency that the Act is
"sufficiently clear to satisfy the requirements" of Pennhurst. Moreover,
there is certainly no basis for estoppel, since the OIG memorandum was
issued well after the time period involved here so that the State could
not possibly have relied on the memorandum to its detriment, one of the
essential elements of estoppel. Moreover, the disallowance is
consistent with the State Medicaid Manual provision quoted above. Also,
OIG is part of HHS, as is HCFA, but we are aware of no authority in OIG
to issue or change policy for administration of the Medicaid program.
At best, the memorandum gave rise to a duty to seek clarification from
HCFA about the applicable policies. Thus, we do not believe that the
OIG memorandum constitutes a policy that would preclude this
disallowance. VI. Whether HCFA failed to properly revoke its prior
approval of MDHS's policy of reimbursing the federal share of
overpayments only upon recovery. The State argued that its longstanding
policy of reimbursing the federal share upon actual recovery of
overpayments by MDHS was both known to HCFA auditors and consistent with
HCFA directives. To establish that HCFA's disallowance is based on a
reversal of longstanding policy, the State relied on the following
statements:

* "For all overpayments that have been recovered (collected or
recouped) determine whether the Federal share was returned." (Emphasis
added by State)$TFrom HCFA's "Title XIX Financial Management Guide, No.
5: Cash Management," August 1982, p. 13. Appeal File, Ex. O.

The State regards as significant that identified but not recovered
overpayments are not mentioned.

* "Enter the total federal share of all collections other than third
party liability collections, probate collections and overpayments
identified through fraud and abuse effort." (Emphasis added by State)$%
From HCFA Action Transmittal 78-95, Appeal File, Ex. P., which
instructed the states how to complete (16) the quarterly expenditure
report, HCFA-64, for Item 9D, Other Collections. * "Our review disclosed
that the Federal share of overpayments recovered within the MDPW (now
MDHS) are properly being credited to the Medicaid program." (Emphasis
added by State)$%From a February 11, 1980 letter from the Regional
Medicaid Director following a review of MDHS procedures for recovery and
reporting of overpayments. The State argued that "(t)he letter evidences
a clear understanding of the procedures used by MDHS, and there is not
one mention of the 'obligation' to repay the federal share of
identified, but uncollected 'overpayments'." The State contended that
HCFA's disallowance was based on an unexplained and uncommunicated
policy which is illegal under standards set by the Supreme Court in
Motor Vehicle Manufacturers' Association v. State Farm Mutual Auto Inc.
Co., 463 U.S. 29, (1983). These standards, as stated by the State,
require that a change in policy be explained, reasonable, and
communicated to the states. The Agency argued, and we agree, that "(t)he
State's conclusion, based on faulty premises, is in error." HCFA
Response, p. 26. We cannot accord the significance the State does to
isolated quotes from materials dealing with accounting for recovered
overpayments. The State's reliance on the "Title XIX Financial
Management Review Guide, No. 5," is simply erroneous. Guide No. 7,
Provider Overpayments, also issued in August 1982, discusses at length
HCFA's policy regarding unrecovered overpayments. HCFA Amended
Response, Ex. 4. The Provider Overpayments Guide states, on page 2: Our
interpretation of section 1903(d)(2) has always been that it does not
matter whether the State has recovered, or ever will recover, the
overpayment. Once a determination has been made that an overpayment
exists, the Federal share must be returned . . . . The Provider
Overpayments Guide briefly summarizes prior policies concerning
accounting for overpayments and summarizes several pertinent Board
decisions. As the Guide explains, prior to September 30, 1981, the
State was required, under 42 CFR 447.296 and HCFA Action Transmittal
77-85, to account for overpayments to (17) nursing homes no later than
the second quarter after the overpayment was found, i.e., the quarter
when the administrative hearing procedures were exhausted. This Guide
goes on to state: The absence of regulations on overpayment recovery
does not preclude HCFA from disallowing the Federal share of such
overpayments. As stated by the GAB, ". . . Under the statute, . . .
the Secretary may adjust for the Federal share of excess payments as
soon as he determines that it constitutes an overpayment to the State."
(citing Massachusetts, Board Decision No. 262)$%Furthermore, the State
ignores the previously quoted provisions of the December 1981 State
Medicaid Manual, Section 2555.2 B. In addition section 2555.2 of the
State Medicaid Manual notes, in section C, that "(T)he HCFA 64 also
shows the Federal share of any recoupment. . . ." Thus, we do not regard
the instructions pertaining to Item 9D, HCFA 64, to be evidence of a
change in policy. Also, we do not regard the letter from the State
Medicaid Director to be evidence of inconsistent or changed policies.
It is clear from the overall context in which the statement cited by the
State appears, that the letter was a review report for certain "units
paticipating in the overpayment identification, recovery and reporting
process" for MDHS. Recognition that recovered overpayments are being
properly credited is not evidence of HCFA policy to require return of
the federal share only upon recovery. At best the State Medicaid
Director's letter tacitly acquiesces in a State practice inconsistent
with HCFA policy. In Florida Department of Health and Rehabilitative
Services, Decision No. 296, May 14, 1982, the Board also dealt with the
question of whether the HCFA disallowance was based on a consistent
policy of which the State had notice. We affirm the conclusion we
reached there, where we stated on page 11: (W)e are not convinced that
the State is correct that the Agency has been inconsistent in either its
interpretation of, or its application of, overpayment policies. Nor are
we persuaded that, even if the Agency's actions in the past were in some
respects inconsistent with the position taken here, this inconsistency
would provide a basis for overturning the disallowance. Here, as in
Florida, we conclude that to the extent the Agency acquiesced in a more
lenient practice than its policy required, (18) "the State can hardly
complain since it would have favored the State. If this disallowance can
be reviewed as a change in practice . . ., it is a change to conform
practice to policy." Decision No. 296, p. 12. The State loses sight that
the underlying issue here is the allowability of FFP in the excess
payments to the nursing home providers and the admitted overpayments
found by the State fraud and abuse and invoice monitoring activities.
There is simply no basis for the State to continue to claim FFP in such
overpayments. There are recorded final amounts due MDHS from the
providers, and the State has not shown that these overpayments are not
unallowable costs. Conclusion For the reasons set forth above, except
for the $13,698.24 discussed in Part IV above, we uphold the
disallowance. The parties must now determine what portion of the amount
disallowed remains unpaid. /1/ The record contains a thorough
explanation of the Minnesota nursing home reimbursement process.
The State submitted the MDHS Rules, which are part of the approved state
plan, setting forth the nursing home reimbursement methodology. State
Appeal File, Exs. F and G. The State also submitted affidavits from
State officials detailing the process whereby the overpayments at issue
here are found and the options MDHS considered available with regard to
recovery, i.e., use of installment payments, etc. State Appeal File,
Exs. H, J, K, L, M, and N. The State's briefs also addressed whether
the MDHS nursing home reimbursement process was a "prospective,"
"retrospective," or "hybrid" system. The State explained the various
circumstances in which nursing home overpayments could arise to be: *
An interim/(lower) final rate differential because the interim rate was
based on projected cost increases which did not actually occur. * The
State's process for depreciation recapture upon the sale of a facility
so that some past years' rates would be rendered too high. * Field
audits disclosing errors in facility cost reports resulting in the
calculation of lower per diem rates for past periods. State Appeal
Brief, pp. 2-11, and State Reply Brief, pp. 2-10. What is significant
with regard to the State's nursing home reimbursement methodology is not
whether the methodology carries any particular label. The fact is that
the rates initially paid, referred to by the State as the interim rates,
may be adjusted downward under certain circumstances, and it is the
adjusted rate which is established by the state plan as the proper
amount of reimbursement. Except for one provider discussed in Part IV,
there is no dispute with regard to the finality of the amount due from
any of the providers. Since the facts are not in dispute here, we do
not go into these matters in the body of the decision. /2/
District courts have reviewed other Board decisions on the issue of
recovery of overpayments. On January 5, 1984, the United States District
Court for the Northern District of Florida, in Florida v. Heckler, Civ.
No. 82-0935, affirmed Board Decision No. 296, holding that the State of
Florida was liable for Medicaid overpayments made to providers
notwithstanding the providers' bankruptcy. On September 27, 1984, the
United States District Court for the Western District of Missouri, in
Missouri Department of Social Services v. Heckler, Case No.
84-4106-CV-C-5 (appeal pending), reversed Board Decision No. 448. The
results of the district court decisions appear to hinge on the type of
rate-setting mechanism and provider payment involved. The court of
appeals decision in Massachusetts, however, allows recovery of the
federal share of the excess payments irrespective of the rate-setting
system that may have generated the overpayments. Cf. Arkansas v.
Heckler, Case No. LR C 83 467, Eastern District of Arkansas, September
17, 1984. The term "improper payments" is sometimes used to distinguish
payments violating federal requirements (even when made) from "excess
payments," representing the difference between final reimbursement rates
and interim rates, where payment at the interim rate was authorized
under the approved state plan. /3/ In the Massachusetts district
court decision (followed in Missouri), the court held that, where there
is an overpayment, there need be no recovery by a state before the
overpayment can be properly disallowed, but disagreed whether there was,
in fact, an overpayment when an interim rate was later found to be
greater than a final rate. In Arkansas, the district court upheld the
Secretary's authority to adjust for excess payments but found the
Board's distinction between overpayments found in a federal audit and
overpayments found in a state audit to be inadequately explained. The
court also disagreed with the Board concerning whether the accuracy of
the federal audit there was, in fact, contested, and remanded the case
for further factual development. /4/ The record shows that "(t)he other
providers involved in the disallowance either failed to appeal
or have exhausted their appeal rights." State's May 8, 1985 letter, p.
1.

AUGUST 08, 1985